Commercial Real Estate Market Outlook

Real Capital Analytics (“RCA”) recorded $115 billion of commercial real estate transactions in the third quarter of 2016, 2% lower than the third quarter of 2015. Year to date, sales have totaled $343B, 9% lower than the same period of 2015, primarily due to fewer portfolio sales. Single asset sale activity has remained flat in comparison to the prior year. According to CBRE Economet-ric Advisors (“CBRE-EA”) and as detailed below, vacancy rates for all major property sectors were unchanged or showed slight improvement during the third quarter.

Multifamily – At the end of the third quarter of 2016, the national vacancy rate for multifamily properties was 4.6%, down 20 bp from the prior quarter and 30 bp higher than the vacancy rate of one year ago. New supply in the second half of 2016 is expected to increase overall vacancy and slow the recent pace of rent growth.

Third quarter 2016 sale volume for multifamily properties totaled $36.8 billion, up 11% from the same period last year. Transactional volume was driven by a 17% increase in the sale of garden apartments while transactional volume for high rise product was essentially flat. In the third quarter, cap rates for multi-family sales averaged 5.4%, down 30 bp from the prior quarter.

Retail – The national retail vacancy rate fell by 20 bp to 10.4% in the third quarter of 2016. Year over year gains in employment and personal income should provide favorable conditions for consumer spending growth.

The retail sector recorded $18.4 billion in sales in the third quarter 2016, down 10% from the third quarter 2015. Retail transaction volume was down 21% in primary markets though offset by an 8% increase in tertiary markets. Average cap rates for retail properties were 6.4% in the third quarter of 2016, unchanged from the prior quarter.

Office – As of September 30, 2016, the national office vacancy level was 13.0%, unchanged from second quarter 2016. Moderate though consistent growth in the service sector has provided support for ongoing office demand.

Office property sale volume was $33.9 billion in the third quarter 2016, down 4% from the third quarter of 2015. The drop in sales volume was primarily due to a 10% reduction in CBD sales volume, offset by suburban office sales which were generally flat in comparison to the prior year quarter. Average cap rates for office transactions decreased 20 bps from the prior quarter, to 6.4%.

Industrial – The national industrial vacancy level fell 40 basis points in the third quarter of 2016, to the post-recession low of 8.4%, resulting in continued upward pressure on rents and an increase in development activity. The vacancy rate in the industrial sector has either remained the same or decreased every quarter for 26 straight quarters, continuing the longest period of vacancy decline that CBRE-EA has ever recorded.

Sales of industrial property totaled $14.2 billion in the third quarter, up 3% from the same period last year. The increase in sales volume was primarily due to an 11% increase in sales in secondary markets in comparison to the prior year quarter. Average cap rates for the industrial sector decreased 30 bps from the prior quarter, to 6.5%.

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